CHLOE Berhad is a Malaysian telecommunication company with a strong global presence The Company had been expanding aggressively in order to capitalize on the low broadband and wireless penetration rates in many developing countries in Asia and Africa However, its expansion via foreign direct invest...

a 1 ANS WER No the company should not accept the uncovered risk associated with the MY R per unit USD exchange rate The company should instead purchas ...

CHLOE Berhad is a Malaysian telecommunication company with a strong global presence. The Company had been expanding

Fantastic news! We've Found the answer you've been seeking!

Question:

CHLOE Berhad is a Malaysian telecommunication company with a strong global presence. The Company had been expanding aggressively in order to capitalize on the low broadband and wireless penetration rates in many developing countries in Asia and Africa. However, its expansion via foreign direct investment had exposed the firm to foreign exchange risks, interest rate risks, and global political risks. CHLOE Berhad is considering an aggressive fund for investment purposes that seeks high global earnings while bearing the risk associated with it. The firm is also aware that the Malaysian Government has imposed restrictions on capital investments to safeguard the valuation of the Malaysian Ringgit (MYR). The value of MYR to US Dollars (USD) has been set at RM4.2/USD for the next five years in order to facilitate MYR floating against other major currencies. The current spot rate is RM4.134/USD. The 180-day term maturities earn an interest of 2.80% per annum. On the other hand, the Great Britain Pound (GBP) - Euro market yields 4.20% per annum on similar 180-day maturities. The current spot rate between GBP and USD is USD2.88/GBP, and the 180-day forward rate is USD2.86/GBP. CHLOE Berhad is aware that the initial investment of GBP 2,000,000 implicitly passes through the USD and then into MYR. Thus, the Ringgit is fixed against USD; hence the ending RM per unit $ rate is the same as the current spot rate. The GBP however, is not fixed to either the USD or MYR. The firm is considering purchasing a forward contract against the USD, allowing them to cover the USD per GBP exchange rate.
Required:
(a) Determine whether the CHLOE Berhad should (1) accept the uncovered risk associated with MYR per unit USD exchange rate (managed by the government) if it should (2) sells the dollar proceeds forward, and (3) if this will yield a more profitable return than a stand along with investment in the GBP-Euro market. (20 marks)
(b) Critically discuss any FOUR (4) possible strategies that Chloe Berhad may adopt to facilitate the repatriation of reserves in both countries. (10 marks)